Gilfoyle v Gilfoyle HC Auckland Ap32-Sw01

[2001] NZHC 814

IN THE HIGH COURT OF NEW ZEALAND
AUCKLAND REGISTRY AP32-SW01

BETWEEN BRIAN RUSSELL GILFOYLE
Appellant

AND PATRICIA JOAN GILFOYLE
Respondent

Hearing: 9 August 2001

Counsel: Mr C.R. Pidgeon QC for Appellant
Ms A.C.M. Fisher for Respondent

Judgment: 3 September 2001

INTERIM JUDGMENT OF LAURENSON J.

Solicitors:
Hesketh Henry, DX CP92093, Auckland
Brookfields, DX CP24134, Auckland

[1] This is an appeal against a decision from the Family Court determining the quantum of the respondent’s interest in a building company pursuant to the Matrimonial Property Act 1976. This company is owned by the parties with the appellant holding all but one share. The company’s business is centred around the appellant who is, in effect, engaged almost entirely by himself as a builder attending to comparatively small, home renovation contracts.

[2] Other matters involving the valuation of the matrimonial home and spousal maintenance payments were also decided in the same decision, but were not the subject of appeal.

[3] The parties had separated on 30 April 1998. The matter was heard in the Family Court on at North Shore on 26 and 27 February 2001. The parties agreed that the value of the respondent’s share should be assessed at the date of separation. The parties accepted there is no relevant distinction between the value of the shares and the value of the business.

[4] In his decision dated 9 March 2001, the learned Family Court Judge found that the value of the business, assessed on a capitalisation of future maintainable profits basis, amounted to $125,960 at the date of separation and hence the respondent’s share amounted to $62,930.

[5] The appellant submitted on appeal the Judge had erred in the following respects:

[a] By rejecting evidence which indicated that as at the date of separation the affairs of the company were in decline. It was submitted there was evidence there were signs that turnover had already declined as at the date of separation and this was confirmed by the results for the ensuing two years. The result was that the figure to provide the basis for the future maintainable profits calculation was excessive.

[b] The Judge was diverted from fixing the fair market value of the shares by wrongly taking into account the income which the appellant would continue to receive by reason of his anticipated continued occupation as a renovating builder. This had resulted in a further error, namely the application of a multiplier of 2 to the base figure which, in turn, added to the excessive final valuation.

[c] By adopting the above approach the Court had failed to “provide for a just division of the matrimonial property between the spouses when their marriage ends”. This being the objective stated in the long title to the Act.

[6] I will refer shortly to each of these matters, in turn:

BACKGROUND

[7] As already stated the company’s business is effectively a one-man building operation. It relied for its success on the appellant’s reputation as a skilled and reliable tradesman, plus the extent to which this factor had found favour with various architects who were prepared to recommend he be given the opportunity to tender for jobs in the home renovation field. In the four years prior to separation the company had an average gross income of $799,450, and an average net profit of $175,982 (22.5%). In the two years post separation, 1999 and 2000, the comparative figures were $664,807 and $70,846 (10.5%).

[8] Two explanations were put forward by the appellant and the valuer called by him, to explain the decline. They were first, a general downturn in the building industry, and secondly, the appellant’s reduced working hours. The valuer, Mr Appleby, considered that as at the date of separation there were signs that the decline in the building industry had started at this point and these were already apparent from the business results.

[9] The appellant also submitted, in terms of practical reality, that given the dependence of the business on him personally, there was little prospect of obtaining a sale of the business, even with a restraint of trade covenant or a lead-in arrangement whereby he would continue to work with, or for, a purchaser, with the intention of passing on his skills and encouraging the confidence of architects in his successor.

[10] The other practical reality was that the appellant would, in fact, be continuing to carry on the business.

CALCULATION OF THE BASE FIGURE

[11] It was accepted that because this company had little in the way of capital assets, including stock on hand, the appropriate method to assess the value of the company was to capitalise future maintainable profits. The first step was therefore to identify an amount as a base figure, assessed as at the date of separation. The Judge accepted the valuation prepared by the respondent’s valuer, Mr Hussey, namely $62,980. This was calculated by averaging the net surpluses after taxation and after making due allowance for shareholder salaries for the four years prior to separation. Mr Hussey also calculated that if the same exercise was undertaken, but including as well the results of the two years post-separation, the resulting figure was $35,175.

[12] The appellant’s argument in this regard on appeal, was that the Judge had failed to correctly interpret the legal principles applying to the extent to which “hindsight” evidence could be taken into account, namely in relation to factual events occurring after the date of valuation.

[13] It was submitted that such evidence was properly admissible in order to arrive at a fair market value as at the date of valuation.

[14] Reliance was placed on a number of authorities including Oppenheimer NZ Ltd v Struthers; Struthers v Oppenheimer NZ Ltd [1994] MCLR 156 wherein Doogue J. said at p.184:

“. . . the issue still arises as to what extent it is appropriate in a case such as this to take into account information available subsequent to the date of the valuation.

I do not intend to traverse all the dicta referred to me. I think it sufficient to cite one short passage in the decision of Williams J. in the High Court of Australia in McCathie & Others v Federal Commissioner of Taxation (1944) 69 CLR 1, 16 -

“The whole tendency of the courts is to admit evidence of any events prior to the date of trial which will throw any real light on the issues.””

[15] I cannot accept this statement as being a correct statement of the law because Doogue J. went on to make it quite clear that hindsight evidence has a much more limited application. His Honour went on to say at p.184:

“It has been submitted for ONZ that it is appropriate to consider evidence as to subsequent events in order to test the reasonableness or validity of the assumptions and projections made at the date the Court considers appropriate for the valuation.”

[16] He then went on to consider the extent to which evidence which was submitted to be hindsight evidence was admissible and concluded that this was “all factors which would properly have been taken into account by the valuer at the time”.

[17] This approach is, with respect, precisely that which the Courts have adopted in New Zealand in relation to hindsight evidence.

[18] I was referred to Wood v Wood [1984] 1 FRNZ 576, a decision of Hardie Boyes J. who said at p.584:

“In this case, whatever valuation date were chosen, the application of hindsight would mean no more than treating assets at their true worth, as established by subsequent events. The alternative would be to take them at their book values, which are likely to be unrealistic, and that would also be unjust. However it is not necessary to resort to the policy of the Act in order to adopt this view. For, first, the theoretical willing but not anxious vendor would not sell at a price that reflected inadequate asset values, and the like-minded theoretical purchaser would not expect to buy at such a price. And secondly, the law is clear that a valuer is required to take into account events that have occurred since the date at which the value is to be assessed; in order to determine the proper weight to attach to the circumstances pertaining at the material date: McCathie v Federal Commissioner of Taxation (1944) 69 CLR 1, 16; In Re Gilmer (deceased), Public Trustee v Commissioner of Stamp Duties [1929] NZLR 61, 63. (I hesitate to rely on what was said in the House of Lords in Bwllfa and Merthyr Dare Steam Collieries (1891) Ltd v Pontypridd Waterworks Co. [1903] AC 426, in view of the clear distinction made between a sale and the particular situation in issue there.) Once it is accepted that the valuation is to be as at April 1982, hindsight properly enables the Totara Flat property to be brought in at close to its sale price, for the sale occurred only a few months later.” (my emphasis)

[19] It is clear from both these decisions that the nature of the hindsight evidence to be taken into account as a check, is a significant factor. In Wood the reference to the Totara Flat property is important. This was an asset owned by the company which was being valued. The Judge accepted that a sale price obtained shortly after the valuation date was a factor which could be taken into account on the basis of hindsight. The sale set the price (presumably a market price). Thus there could be no dispute that the sale represented the value. There could be no doubt about that.

[20] The position is quite different in the present case. I will refer to this again shortly.

[21] Before doing so it is necessary to identify what the Judge said in this case about the hindsight principle. At paragraph 11 of his decision he said:

“A separation date valuation, whether or not based on future maintainable earnings, necessarily relies on historical data available at the separation date which may be assumed to represent the likelihood of future performance, subject only to allowance for such contingencies, favourable or unfavourable, which can reasonably be predicted at the date of separation as likely to arise. Events which have actually followed the separation are properly used only as a means of checking the accuracy of the reasonable predictions inherent in a separation date valuation, bearing in mind that the hypothetical sale takes place at the date of separation: see Haldane v Haldane [1981] 1 NZLR 554 (CA), where the valuation exercise at the date of separation was of a superannuation entitlement which in the period following the separation had increased phenomenally. Cooke J. pointed out:

‘Caution is necessary in assessing future prospects and the Court must be on guard against being unduly influenced by what in fact has happened since the separation.’”

[22] This statement is, in my view, completely in accord with the authorities I have referred to.

[23] The Judge then went on to apply that principle to this case. He went on to say:

“In the present case there is no evidence to suggest that a downturn in performance of the kind indicated by the 1999 - 2000 figures was likely, or, to put the same point in another way, that performance measured by the 1995 - 1998 figures was unlikely to be maintained. However, the 1999 - 2000 figures, to the extent that they can be accounted for by a general temporary market recession, and to the extent that they are relevant to a separation date valuation, act as a reminder to the valuer not to ignore the possibility that this kind of business, however, reputable and efficient, may encounter slack periods as the result of external economic conditions. That possibility - like other possibilities such as the person who is the key driving force in the business suffering a disabling accident or dying - may rightly be factored in to a valuation based on historical performance prior to the valuation date, and Mr Hussey in this case correctly suggested that this kind of factor could be reflected in the choice of multiplier.”

[24] Here the Court was faced with evidence of hindsight, namely the company results for 1999 and 2000. That evidence was not, by itself, conclusive, as was the case with the hindsight evidence of the property sale in Wood.

[25] It required evaluation. The Judge concluded the decline was not evidence of a general decline, but rather simply an example of a slack period such as had occurred in 1997.

[26] Thus, faced with evidence of post-separation events, the Judge did precisely what he was enjoined to do by the Court of Appeal in Haldane v Haldane [1981] 1 NZLR 555 in which Cooke P. said at p.558:

“Provided that a valuation is made prudently, it should not be unfair. Caution is necessary in assessing future prospects and the Court must be on guard against being unduly influenced by what in fact has happened since the separation.”

[27] It was submitted on behalf of the appellant that this statement was applicable only to the valuation of assets such as a superannuation fund. Whilst it may apply with less force to evidence of an actual sale of a property post-valuation date, I cannot see that it is any the less relevant in relation to the valuation of company shares in the absence of an actual open market sale of those shares.

[28] For these reasons I conclude that not only did the Judge correctly state the law, he also applied it correctly when determining the base figure to be capitalised as a maintainable future earning.

THE FIXING OF THE MULTIPLIER

[29] Under this head the first point to be noted is that the Judge, when selecting a multiplier, specifically took into account the hindsight factor just referred to:

“I am not prepared on the evidence to attribute the very much more marked decline in the years 1999 and 2000 solely to market conditions and am not prepared to treat the 1999 and 2000 figures as representative of the functioning of the business over a longer timespan. Temporary lulls in the market are reasonably predictable in a business of this nature whatever valuation date is fixed. While there is no evidence that the supply of houses likely to require renovation or alteration in the Auckland area is becoming exhausted, I am left with the impression that a valuation based on the performance of the business in the four years prior to separation may not take sufficient account of the likelihood that there will be periods when demand for the services of the business will be somewhat less than normal. I also consider that a multiplier of 3 takes insufficient account of the degree of vulnerability produced by the lack of an established client base. For those reasons I consider that there should be a downward adjustment to the capitalisation rate or multiplier. A properly cautious adjustment would result in a multiplier of 2, which on my view of the evidence results in a fair price which the husband could expect to receive on a hypothetical sale to a hypothetical purchaser, including himself.”

[30] The second ground of appeal was, however, more specifically directed to what was submitted to be an error on the Judge’s part when fixing the multiplier of 2. This was said to have come about because -

“. . . the Judge was diverted from fixing the fair market value of the shares by a view that as the husband was (para 22) “securing for himself the whole of the future income flow of the business”, then in some way he should pay a price which reflected that. The test still should have been “the willing vendor and willing purchaser” test.”

[31] On my reading of the decision this was precisely what the Judge set out to avoid. This is made clear by reference to the whole of paragraph 22 of the decision:

“I have considered whether the choice of a multiplier of 2 could be over-conservative, bearing in mind that the husband, in effectively buying out the wife’s matrimonial property interest for $62,980, is securing for himself the whole of the future income flow of the business. I think, however, that to go beyond that multiplier in the present case is to risk confusion of division of the value of the business as matrimonial property with division of the husband’s future earnings from the business. the husband’s post-separation benefits derived from the income flow of the business cannot be treated as matrimonial property: see Z v Z (No. 2) [1997] 2 NZLR 258 (CA) at 283-4, (unrelated to the earlier Court of Appeal case of Z v Z, discussed above).” (my emphasis)

[32] This passage indicates the Judge clearly noted the distinction between the value of an asset which has the capacity to produce income in the future and that future income which cannot be treated as matrimonial property. In this regard it is also important to note the base figure for the calculation specifically excluded the amount of a notional salary payable to the appellant in his capacity as an employee of the company. Thus one significant element of the appellant’s future earnings from the business was, in any event, excluded from the calculation of the future maintainable income of the business from the outset.

[33] For these reasons I am satisfied the Judge correctly identified the issues to be taken into account when identifying an appropriate multiplier. Furthermore when doing so he specifically avoided the error which is alleged to have occurred.

DID THE RESULT REPRESENT A JUST DIVISION OF THE MATRIMONIAL ASSET?

[34] For the reasons which I have stated I do not consider the Judge did err when coming to the conclusion he did by applying recognised principles applicable to the assessment of the value of a company, the shares in which were accepted as being matrimonial property.

[35] The appellant has submitted, however, the net result was “grossly excessive and does not represent a just division of matrimonial property”.

[36] Again, I do not agree. My reasons are:

[a] In this case the Court was required to assess the nature of a business which happened to be owned by a company. The allocation of the shareholding was irrelevant because the parties accepted they had contributed equally to the value of the company.

[b] Their contributions were quite different. The appellant provided the labour and expertise, the respondent provided the support of a wife in the home to enable him to devote his time to the company’s affairs. In so doing she lost her opportunity to earn an income at anything like that of the appellant.

[c] Nevertheless she acquired a half interest in an asset which had the capacity to keep on producing income.

[d] The Court had to decide what was the value of that future earning capacity as at the date of separation.

[c] Because the asset consisted of shares in a company the Court applied one of the recognised methods of determining a value of the company at a particular point. The basis for so doing is explained in Z v Z [1989] 3 NZLR 413 where Richardson J. (as he then was) said at p.414:

“The Matrimonial Property Act does not specify the principles to be applied in valuing matrimonial property. What it calls for is a just division between spouses of matrimonial property. Concerned as they are with the same subject matter and the same goal of making a fair assessment of the value of the property in question, valuations of assets for matrimonial property purposes have naturally drawn on principles developed in the context of valuations for duty purposes. The test has been variously phrased, but in essence it calls for an inquiry as to the value at which a willing but not anxious vendor would sell and a willing but not anxious purchaser would buy. This is essentially a practical question, not to be overlaid by philosophical or legal niceties (Hatrick v Commissioner of Inland Revenue [1963] NZLR 641, 611).

How particular items of property should be divided or grouped for valuation purposes is a practical question which arises for consideration in various circumstances.”

[37] The method of valuation used in this case, incorporating, as it did, the conceptually difficult notions of the hypothetical vendor and purchaser, became somewhat strained in the face of the actual circumstances. The reality was, and is, that the business probably has no value without the involvement of the appellant. There is little likelihood of there being a market for it, even with a restraint of trade covenant being imposed on the appellant, or some lead-in arrangement being reached with a purchaser whereby the appellant worked with, or for, the purchaser for some period.

[38] In the meantime all the probabilities point to the appellant being able to continue operating the business for some indeterminate period. While he does so he will continue to derive the benefit of the 50 per cent contribution which the parties agree was provided over the period of the marriage by the respondent.

[39] The sole question to be determined was how much the respondent should receive at a particular point, namely the date of separation, for her half share in an intangible asset, namely the business.

[40] Given the future imponderables the Judge was required to balance these against the future probabilities.

[41] The complexity of both did not allow for a simple amortised calculation of expected net income over the period of the expected working life of the appellant.

[42] In the result the Judge concluded, after considering both the imponderables and the probabilities, that a figure based on an average of the net income over the preceding two years and capitalised for two years represented a fair division of the capital value of the asset as at the date of separation.

[43] In fact, as later events have proved, the business did not produce net incomes over the succeeding two years which met the amount of the calculation.

[44] That, to my mind, is irrelevant. Although the calculation was arithmetically determined on the basis of a particular sum for two years,. the concept behind the calculation sought to encompass a situation which, with all its imponderables, could reasonably be expected to continue on into the future. Whatever may be the future outcome of the business, the appellant will continue to derive the benefit of the respondent’s contribution. She, in turn, will not. To compensate her for this she is to receive a fixed sum now. In terms of the amount she is to receive, balanced against the reality of the business in fact continuing on at the present time, I cannot see that this can be regarded as excessive. In my view it can be said to be a fair division of the particular matrimonial asset.

[45] For the above reasons I disallow the appeal. The respondent is entitled to costs which I allow on the 2B formula.